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    Cost Classifications and Calculations

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    1. Classify each of the following manufacturing costs as direct or indirect for automobiles:

    a. insurance on manufacturing equipment
    b. cost of steel plates used in making an automobile body
    c. wages of assembly workers
    d. salaries of plant personnel
    e. cost of tires
    f. overtime premiums paid to assembly workers
    g. depreciation of the factory building
    h. cost of electric power to operate machines
    i. production workers holiday and vacation pay benefits
    j. wages of materials handling workers
    k. cost of seats placed in automobiles
    l. quality inspection costs

    2. Classify the following costs as unit related, batch related, product sustaining, or business sustaining activity costs.

    a. direct materials
    b. set up labor wages
    c. salaries of plant engineers responsible for executing engineering change orders
    d. corporate office building depreciation
    e. direct labor wages
    f. purchase order clerk wages
    g. product design engineer salaries
    h. rent for plant building
    i. quality inspection of first item produced in each batch
    j. moving materials from one machine to the next
    k. accounting
    l. sales support of individual products

    3. The information below pertains to July production at Porter Companys paint factory, which produces for household interiors.

    Work in process
    July 1-----------------------3,000------30%complete--------------------20% complete
    started in July-------------7,000-------------------------------------------------------------
    To account for-----------10,000-------------------------------------------------------------

    Completed and
    transfered out------------6,000-----100% complete------------------100% complete
    Work in process
    July 31---------------------4,000-----25% complete---------------------10% complete

    Using the weighted average method, determine the number of equivalent units of production for materials and conversion during July.

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    Solution Preview

    I have copied and pasted my solutions as well as attached them as a Microsoft Word file. I wasn't sure if the formatting would be clear after it has been copied and pasted.

    Direct Versus Indirect Costs

    First, I will briefly clarify the difference between direct and indirect costs. Direct costs are those that are traceable to the products. For example, if you are building tables inside a warehouse, the wood that the tables are made of would be an example of a direct cost. The cost to heat the warehouse is an example of an indirect cost. Indirect costs are necessary costs incurred in the production of the product however; they are not directly or easily traced to specific products.

    (a) Insurance - this is not easily traced to a specific product therefore it is an indirect cost
    (b) Steel plates - these are parts of the product being produced and are therefore direct costs
    (c) Wages of assembly workers - this is the labor required to turn the raw materials into the finished product. Each unit (such as hour) can be traced to a specific product. This is a direct cost.
    (d) Salaries of plant personnel - this is somewhat ambiguous. Assuming this is supposed to imply supervisory personnel who are not working on a specific product; this would then be an indirect cost.
    (e) Tires - they are a part of the automobile and therefore a direct cost
    (f) Overtime premiums to assembly workers - the extra hours worked can be easily traced to the specific products, therefore this is a direct cost
    (g) Depreciation of the factory building - not directly traced to a specific product therefore an indirect ...

    Solution Summary

    The question gives examples of several costs and asks for the characterization of such costs as direct versus indirect and as unit level, batch level, product sustaining, or business sustaining activity costs. The question also asks for calculations of equivalent units of production based on data regarding the inventory account and percentage completion for conversion costs and direct materials.